Last Updated: June 10, 2024, 9:41 am by TRUiC Team


How to Start an S Corp as an Electrician

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your electrician business save money on its taxes. Electricians operate across the country and, while many electricians may already have a large client base, saving money on your taxes can still lead to a substantial increase in your total profits each year. 

If your electrician business meets the IRS’ criteria and you’re willing to do some extra paperwork, you might save thousands of dollars at tax time by electing S corp status.

Recommended: Save yourself the hassle and use a professional service like ZenBusiness to help you handle the initial S corp election paperwork.

Electrician doing work.

What Is an S Corporation?

An S corporation (S corp), also known as Subchapter S, is a tax status with strict IRS requirements and restrictions. If your business meets the requirements to be taxed as an S corporation, you will be eligible for certain tax benefits such as pass-through taxation and self-employment tax savings, which can be significant. 

Essentially, an S corporation provides the perfect opportunity for business owners to have both the benefits of a default LLC with pass-through taxation and some of the perks of a C corporation without the dreaded double taxation. 

S Corp Requirements

In order to be taxed as an S corporation, your electrician business must meet the following requirements:

  • Has 100 shareholders or less
  • Is a domestic LLC or corporation
  • Issues only one class of stock
  • Shareholders are US citizens or permanent resident aliens
  • Is owned by private individuals

What Type of Business Structures Can Start an S Corp?

An S corp designation can be elected by a formal business structure, specifically an LLC or a corporation. Informal business structures such as sole proprietorships and partnerships are not eligible for the S corporation classification. 

How to Start an LLC Tip Icon

Don’t have a formal business structure? If your electrician business isn’t currently an LLC or C corporation, our friends at ZenBusiness can form your legal business entity for you and elect S corp tax status in no time.

S Corp Tax Benefits Electricians Should Know About

S corporations enjoy certain tax benefits, such as pass-through taxation (all losses and profit — credits, distributions, deductions — pass directly to the owner). This is similar to how default LLCs are taxed. With pass-through taxation, all profits bypass the company and go directly to the owners, and owners pay on their personal tax return at their regular income tax rate.

Default LLC Taxes Explained

Business owners of default LLCs pay self-employment taxes and income tax on the distributions passed down to them. In other words, both types of taxes are imposed on all the money they receive after paying business expenses. Self-employment taxes include social security and medicare, and these two taxes 

S Corp Taxes Simplified

With an S corporation, owners are classified as employees and are paid in two ways: a salary and distributions.

Reasonable Salary

Since owners are employees, they must receive a salary, and therefore they must run payroll. Business owners pay self-employment taxes and income tax on their salaries. If you elect the S corp tax designation, you must pay yourself a “reasonable” salary. According to the IRS, this means an annual wage equivalent to what someone doing your same job would earn for that work. 

Your location also can impact what qualifies as “reasonable” so remember to factor that in when calculating your salary. Resources like Glassdoor and the US Bureau of Labor Statistics can help you find an accurate figure for your job in your location.

The three tiers of electricians — apprentice, journeyman, and master — command different salaries based on their overall experience and certifications. In the United States, the average annual salary for an apprentice electrician is $45,258 compared to $68,000 for a journeyman electrician and $70,600 for a master electrician. When comparing salary ranges, make sure you account for the electrician tier into which you fall.

Distributions

Unlike with a reasonable salary, the owner only pays income tax on the distributions. This means the business owner does not pay the self-employment tax of 15.3% on money taken as a distribution. 

When Should an Electrician Elect S Corp Status for a Business?

This is a subjective question and will depend on your business and your goals. You need to be sure to take enough money in distributions to benefit from the advantages offered by an S corporation and offset the additional paperwork and fee associated with running payroll. In general, you will likely benefit from S corp status once your business makes at least $60,000 in earnings and $20,000 in annual distributions. These numbers are after paying business expenses. The IRS requires S corp owners to pay themselves a reasonable salary to ensure they aren’t lowering their compensation to avoid paying more on taxes — which would lead to loss of S corp status, fines, and even business dissolution.

Use our S Corp Tax Calculator to find out if an S corp is right for your business. Calculate your savings below:

S Corp Savings Calculator

Calculate how much you can save by choosing an S Corp tax classification

Recommended:

Are you a solopreneur looking to start your S corp or convert your existing LLC and start saving on taxes? Get your S corp started today with ZenBusiness.

Six Basic Steps to Start an LLC and Elect S Corp Status:

  • Step 1: Select a State
  • Step 2: Name Your LLC
  • Step 3: Choose a Registered Agent
  • Step 4: File the Articles of Organization
  • Step 5: Create an Operating Agreement
  • Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status

Step 1: Select Your State

Step 2: Name Your LLC

If you don’t already have a business, you will first need to form one. You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.

Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their businesses.

Step 3: Choose an LLC Registered Agent

Your S corp registered agent will accept legal documents and tax notices on your business's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Step 4: File Your LLC's Articles of Organization

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.

Step 5: Create an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 6: Get an EIN and Complete Form 2553 on the IRS Website

An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business. 

EINs are free when you apply directly with the IRS.

Elect S Corp Tax Status

During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.

Steps to Take After Starting an S Corp

Once you formalize your S corp, be sure to get your financials in line so you are ready to begin operating.

For business banking, check out our guide on the best banks for small businesses.

If you need to build your S corp credit, read our guide on how to build business credit and get a business credit card through Divvy.

Recommended: You’ve worked hard and deserve a break! If you make at least $20,000 in distributions, let ZenBusiness start your S corp, so you can focus on your business.

Electrician Business Information

Electricians install and repair the electrical circuits used in homes and businesses. It’s a profession found in nearly every state and county nationwide. Estimates from January 2023 show more than 1 million employed electricians and 219,768 electrician businesses operating within the United States.

Why Most Electrician Businesses Should Have a Legal Business Entity

Electrician businesses should register as legal business entities because doing so provides them with liability protection. Without that protection, a third party can sue an employee for work they did for the company — a situation that could lead to financial ruin. 

If a fire breaks out while you’re working on a job, for example, the property owners could sue for the resulting damage. If your company isn’t a legal business entity, they can sue you directly and you could lose your personal assets (e.g., your home or car). Legal business entities, however, only allow third parties to sue the business itself thus protecting your personal assets in the event of a lawsuit. 

Registering your electrician business as a legal business entity also will give it more legitimacy. A formal business structure can help you attract more clients and investors — both of which can help your business grow.

Is an S Corp Right for My Electrician Business?

There’s no simple answer to this question because every business is different. The most important things to consider are your long-term goals for your business. 

To qualify for S corp status, you must pay yourself a reasonable salary for your work and run payroll for all of your employees. Running payroll incurs additional accounting costs so the money you save on taxes may not outweigh these extra costs. If you already run payroll for your employees, this won’t be an issue. If not, these added costs may deter some business owners.

If you want to take on more investors, electing S corp status may not benefit your business. Because the IRS caps an S corp’s shareholders at 100, you may be better off making your electrician business a C corp if you plan to take on significant venture capital from outside sources.

You also should consider if you want to take some extra money from your business’s profits for yourself or reinvest it into your company. S corp status requires owners to not only pay themselves a reasonable salary, but also take distributions from their company’s total profits each year. To reap the tax advantages of an S corp, the IRS recommends you take at least $10,000 in distributions. If you’d rather put that money back into your business to drive growth, having the IRS tax your business as an LLC may suit you better.

If these criteria fit with your business plans, electing S corp status can save you money on your taxes and benefit your business going forward. If any of these requirements seem unreasonable, however, you should retain your business’s current tax status and file regularly.

Electrician S Corporation Examples

While some electrician businesses will benefit from the S corp tax designation, others won’t. Here are two examples to help illustrate when it’s advantageous to elect S corp status.

Scenario 1:

Let’s say you run an electrician business that’s been open for many years in a large city. Your profits are rather consistent each year and you have many faithful clients who call on you when needed. 

This business has six electricians, including yourself, plus four part-time employees who schedule appointments and handle customer service. With this many employees, you’ve enlisted the help of a local accounting firm to help run your payroll for the past five years. After years of operation, you believe your business is exactly how you want it and you don’t intend to change it for the next five or so years. 

As long as you have fewer than 100 shareholders, electing S corp status could save you money come tax time. Because you already run payroll and don’t intend to expand your business, you could easily take a distribution of $10,000 or more and still enjoy the tax benefits of an S corp.

Scenario 2:

Now, imagine running a similar electrician business in a large urban area with several electricians working together. Yet, in this scenario, you hope to grow your business in order to serve a larger customer area. 

Specifically, you want to run some advertising campaigns and move into a larger office that can house all of your employees and vehicles. During your business’s several years of operation, you bought many used work vehicles and would now like to purchase new ones to enhance your company’s legitimacy. 

In this instance, electing S corp status won’t benefit your business. While you may run payroll for all of your employees already, taking a distribution would limit the funds available for your business’s expansion. Reinvesting money in your company by purchasing a new office, new vehicles, and advertising campaigns likely would eat into your distribution and negate the tax advantages an S corp can offer.

Start an S Corp FAQ

An S corporation (S corp) is a tax classification that an LLC or a corporation can apply for that provides self-employment tax savings on distributions.

If you already have an LLC or C corporation, you can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

S corps offer businesses tax advantages, and owners of S corps can save thousands of dollars on self-employment taxes.

While both LLCs and S corps benefit from pass-through taxation, they are not taxed the same way.

With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax. With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

An electrician’s salary depends on their proficiency at the apprentice, journeyman, or master level. The average annual salary in the United States for an apprentice-level electrician is $45,258 compared to $68,000 for a journeyman and $70,600 for a master. 

Pay scales do tend to vary by location so factor that into your reasonable salary calculation. For example, an apprentice electrician in Bismarck, N.D., makes an average of $57,294 per year while an apprentice in Baton Rouge, La., earns an average of $45,750.

A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employees' salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket. 

In some states like California and New York, S corps may pay some form of tax at the corporate level.

No. Your business would remain an LLC or a C corp if you elect S corp status because the S corp tax designation isn’t a business structure. If you run an LLC that successfully obtains S corp status, you’d still be an LLC that the IRS now taxes as an S corp.

Because distributions aren’t subject to self-employment tax, it may seem tempting to take a larger distribution and a smaller salary. However, your salary can fall outside the range of a reasonable salary if it’s too low. S corps face additional IRS scrutiny because of the incentive to pay their owners the lowest possible salary. A salary that doesn’t qualify as “reasonable” will raise a red flag with the IRS.